Excess credit growth has allowed us to spend more than we earn. Photo / Michael Craig

Excess credit growth has allowed us to spend more than we earn. Photo / Michael Craig

You can have too much of a good thing, they say. Maybe credit is one of those things.

For almost all of the past decade private sector credit - lending from both banks and non-bank financial institutions - has been growing faster, much faster, than the real economy plus the inflation target.

But what has that excess credit growth bought us?

It allowed a housing bubble to develop as prices were bid up to socially destructive levels.

It allowed growth in consumer spending to outstrip growth in incomes, to the point that by 2007 households were spending $1.13 for every $1 they earned.

It has been reflected in a blowout in the current account deficit that has pushed the country's net external liabilities, mainly debt, to nearly 100 per cent of GDP.

And in the process the dollar has been for long periods at levels painfully high for the tradeables sector.

More than once during the boom, Reserve Bank Governor Alan Bollard voiced frustration at the difficulties of running an independent monetary policy for a small open economy in an era of huge globalised financial markets, in particular of trying to tighten when the rest of the world was awash with cheap money.

For three-and-a-half years he drove the official cash rate higher, dragging the exchange rate with it, but gaining little traction in the mortgage belt as banks borrowed cheaply abroad to meet borrowers' avid demand for credit.

The problem of how to keep inflation in bounds without inflicting collateral damage on exporting and import-competing firms has vexed policymakers for several years.

A search party of officials was sent out to look for "supplementary stabilisation instruments" but they came back pretty much empty-handed. A long parliamentary select committee inquiry into the issue was no more fruitful.

But now Wellington economist David Preston is proposing a change to the monetary policy regime which he argues will address these issues.

In a paper to a New Zealand Association of Economists conference yesterday, Preston advocates giving the Reserve Bank an additional target and an additional instrument to meet it.

If monetary policy were operating effectively it would be reasonable to expect the trend rate of growth of credit to the private sector to be somewhat similar to the trend rate of growth in real output plus the target for price movements, he says.